I’m a big fan of the Roth IRA. I think it’s one of the best retirement savings tools available to the individual investor, and I always try to take advantage of it when I can. But, there were times when I couldn’t contribute.
Back in May of 2006 there was a pretty significant change to the tax laws involving converting a traditional IRA to a Roth IRA. One of those changes included the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA to be eliminated come 2010.
Essentially, this now means that almost anyone with a Traditional IRA, regardless of income level, can convert their Traditional IRA into a Roth IRA beginning this year (see IRS rules).
I mention this only because, although I try to contribute the maximum amount to a yearly Roth IRA, I’m one of those folks that (fortunately) borders on the cusp of earning too much to qualify for a contribution. There were a couple of years (2005-06) where I wasn’t able to contribute to a Roth IRA, and knowing that conversion income limits were going to be rescinded in 2010, I contributed to a non-deductible Traditional IRA instead.
Now is when that strategy pays off. Taking advantage of the recent stock market pullback, I converted my Traditional IRA into a Roth IRA today.
Nothing has changed about my investment except it’s characterization. I still have my savings invested in the same mutual fund (VTTVX) through Vanguard. But, because it was a non-deductible IRA, and because the price of that mutual fund has fallen in tandem with the markets, I shouldn’t owe any taxes (or minimal taxes) generated from this conversion.
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